chinayilipetro10q.htm

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		Page No
Part I	Financial Information
Item 1.	Unaudited Financial Statements :
	Consolidated Balance Sheets – September 30, 2011 and December 31, 2010	2
	Consolidated Statements of Operations and Comprehensive Losses – for the Three and Nine Months Ended September 30, 2011 and 2010 and the Period from Inception to September 30, 2011	3
	Consolidated Statements of Cash Flows – for the Nine Months Ended September 30, 2011 and 2010 and the Period from Inception to September 30, 2011	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3	Quantitative and Qualitative Disclosures about Market Risk	11
Item 4	Controls and Procedures	12
Part II	Other Information
Item 1.	Legal Proceedings	13
Items 1A.	Risk Factors	13
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3.	Defaults upon Senior Securities	13
Item 4.	Reserved	13
Item 5.	Other Information	13
Item 6.	Exhibits	14
Signatures

CHINA YILI PETROLEUM COMPANY AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,
	2011			2010
	(Unaudited)
ASSETS

CURRENT ASSETS:
Cash	$	399		$	692
Other current assets		565			547
TOTAL CURRENT ASSETS		964			1,239

Property and equipment, net of accumulated depreciation		9,433,497			9,176,508

TOTAL ASSETS	$	9,434,461		$	9,177,747


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	2,211,780		$	2,143,942
Due to shareholder		447,786			378,700
Accrued expenses		747,105			648,365
TOTAL CURRENT LIABILITIES		3,406,671			3,171,007

STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value,
4,700,000 shares authorized
0 shares issued and outstanding
at September 30, 2011 and December 31, 2010		-			-
Preferred stock, Series A, $0.001 par value,
300.000 shares authorized
0 shares issued and outstanding
at September 30, 2011 and December 31, 2010		-			-
Common stock, $0.001 par value,
100,000,000 shares authorized,
29,748,348 shares issued and outstanding
at September 30, 2011 and December 31, 2010		29,748			29,748
Additional paid-in capital		6,824,155			6,799,332
Deficit accumulated during development stage		(2,128,057	)		(1,932,293	)
Accumulated other comprehensive income		1,301,944			1,109,953
TOTAL STOCKHOLDERS' EQUITY		6,027,790			6,006,740

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	9,434,461		$	9,177,747

CHINA YILI PETROLEUM COMPANY AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)

													From Inception
	For the three months ended						For the nine months ended						May 27, 2005
	September 30,						September 30,						to
	2011			2010			2011			2010			September 30, 2011


Revenue	$	-		$	-		$	-		$	-		$	-

COSTS AND EXPENSES:
General and administrative expenses		53,622			74,830			170,941			252,787			1,996,384
Imputed Interest - stockholder		14,880			7,369			24,823			15,271			74,243
TOTAL COST AND EXPENSES		68,502			82,199			195,764			268,058			2,070,627

NET LOSS FROM CONTINUING OPERATIONS		(68,502	)		(82,199	)		(195,764	)		(268,058	)		(2,070,627	)

NET LOSS FROM DISCONTINUED OPERATIONS		-			-			-			-			(57,430	)

NET LOSS		(68,502	)		(82,199	)		(195,764	)		(268,058	)		(2,128,057	)

OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments		71,516			80,850			191,991			121,348			1,301,944
TOTAL COMPREHENSIVE INCOME (LOSS)	$	3,014		$	(1,349	)	$	(3,773	)	$	(146,710	)	$	(826,113	)

Basic and diluted loss per common share:	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)

Weighted average number of shares outstanding:		29,748,348			29,748,348			29,748,348			29,748,348


The accompanying notes are an integral part of the consolidated financial statements

CHINA YILI PETROLEUM COMPANY AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

							From Inception
	For the nine months ended						May 27, 2005
	September 30						to
	2011			2010			September 30, 2011
OPERATING ACTIVITIES:
Net loss from continued operations	$	(195,764	)	$	(268,058	)	$	(2,070,627	)
Net loss from discontinued operations		-			-			(57,430	)
Net loss		(195,764	)		(268,058	)		(2,128,057	)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		32,857			41,350			236,534
Imputed interest		24,823			15,271			74,242
Changes in operating assets and liabilities:
Other current assets		-			-			(565	)
Accounts payable		-			-			2,211,780
Accrued expenses		80,474			143,807			747,105

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(57,610	)		(67,630	)		1,141,039

INVESTING ACTIVITIES:
Acquisition of property and equipment		-			-			(9,670,031	)
NET CASH USED IN INVESTING ACTIVITIES		-			-			(9,670,031	)

FINANCING ACTIVITIES:

Proceeds of loan from stockholder		59,337			65,497			447,786
Capital contribution		-			-			6,779,661

NET CASH PROVIDED BY FINANCING ACTIVITIES		59,337			65,497			7,227,447

EFFECT OF EXCHANGE RATE ON CASH		(2,020	)		3			1,301,944

INCREASE (DECREASE) IN CASH		(293	)		(2,130	)		399

CASH - BEGINNING OF PERIOD		692			3,161			-

CASH - END OF PERIOD	$	399		$	1,031		$	399

The accompanying notes are an integral part of the consolidated financial statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The consolidated balance sheet as of December 31, 2010 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. These interim financial statements should be read in conjunction with that report.

Since inception, the Company has been developing its facilities and obtaining the requisite approvals from the Chinese government and has not earned any revenue from operations. Accordingly, the Company’s activities have been accounted for as those of a Development Stage Enterprise. The Company’s financial statements are identified as those of a development stage company, and that the statements of operations, stockholders’ equity and cash flows disclose activity since the date of the Company’s inception.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown on the accompanying financial statements, the Company’s current liabilities exceeded its current assets by $3,405,707 on September 30, 2011. The Company has sustained an accumulative loss of $2,128,057 from its inception to September 30, 2011. In addition, the Company has not earned any revenues from continuing operations since inception. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. Actual results could differ from those estimates.

Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For assets that are to be held and used, an impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, recognition of future tax benefits, such as carryforwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax assets will not be realized.

The assets and liabilities of the Company’s subsidiary, using the local currency as its functional currency, are translated to U.S. Dollars based on the current exchange rate prevailing at each balance sheet date and any resulting translation adjustments are included in Accumulated Other Comprehensive Income (Loss). The Company’s revenues and expenses are translated into U.S. Dollars using the average exchange rates prevailing for each period presented.

Basic income (loss) per common share amounts is computed by dividing net income by weighted-average common stock outstanding during the period. Diluted income (loss) per common share are calculated using weighted-average shares outstanding, adjusted for the dilutive effect of shares issuable upon the assumed exercise of common stock equivalents. As of September 30, 2011 and September 30, 2010, there were no common stock equivalents outstanding.

Comprehensive income is defined to include all changes in equity except those resulting from investments by shareholders and distributions to shareholders. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation gain, net of tax.

· Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, approximate fair value due to the short-term nature of these items. The Company did not identify any other assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with ASC 820.

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

The Company is potentially exposed to risks of losses that may result from business interruptions, injury to others (including employees) and damage to property. These losses may be uninsured, especially due to the fact that the Company’s operations are in China, where business insurance is not readily available. If: (i) information is available before the Company’s financial statements are issued or are available to be issued indicates that such loss is probable and (ii) the amount of the loss can be reasonably estimated, an estimated loss will be accrued by a charge to income. If such loss is probable but the amount of loss cannot be reasonably estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period. As of September 30, 2011, the Company has not experienced any uninsured losses from injury to others or other losses.

The PRC government imposes control over the conversion of Renminbi, or RMB, into foreign currencies. Pursuant to the Foreign Exchange Control Regulations of the PRC issued by the State Council which came into effect on April 1, 1996, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which came into effect on July 1, 1996, regarding foreign exchange control, conversion of RMB into foreign exchange by Foreign Investment Enterprises, or FIEs, for use on current account items, including the distribution of dividends and profits to foreign investors, is permissible. FIEs are permitted to convert their after-tax dividends and profits to foreign exchange and remit such foreign exchange to their foreign exchange bank accounts in China. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, which provides that the PRC government shall not impose restrictions on recurring international payments and transfers under current account items. Enterprises in China, including FIEs, which require foreign exchange for transactions relating to current account items, if within a certain limited amount may, without approval of the State Administration of Foreign Exchange, or SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs. Conversions in excess of prescribed limits, however, require the prior approval of SAFE.

Obtaining approval from SAFE for foreign currency conversions can be a time-consuming process. Moreover, the PRC government from time to time modifies its regulations regarding conversion of RMB into foreign currencies, and may in the future impose further restrictions on transactions relating to current accounts. For all these reasons, our ability to pay dividends in the future may be limited by our inability to readily transfer funds from our PRC subsidiary to our U.S. parent corporation.

The refining of petroleum involves the production of pollutants. In addition, the transportation of petroleum products entails a risk of spills that may result in long-term damage to the environment. There is increasing concern in China, however, over the degradation of the environment that has accompanied its recent industrial growth. It is likely that additional government regulation will be introduced in order to protect the environment. Compliance with such new regulations could impose substantial additional costs to the Company.

In past years, China has experienced a real estate boom, which also triggered the rapid development of the construction industry, which uses asphalt as a major material. However, in 2010, the Chinese government implemented a series of policies and regulations to curb inflation in the property market. These policies, together with the worldwide financial crisis started in late 2008, have resulted in a slowdown of the real estate market in China and our business, in turn, has been affected. Recently, the Chinese government has changed its policy and prioritized boosting of the economy. The Chinese government has adopted new policies to address the slowdown of the real estate market, such as reducing stamp duties and transactions fees, lowering interest rates. The Chinese government has also decided to inject a stimulus package to boost the overall economy. From all of these, we have seen signs of recovery of the market in China.

The Company has not yet initiated sales and production activities. As a result, during the three and nine month periods ended September 30, 2011 and 2010, the Company did not generate any revenue. Nor did it incur any cost of goods sold. At this time it is not possible to predict when the Company will initiate operations, as that will depend on the availability of financing and demand for the Company’s products.

Total operating expenses reported by the Company for the three and nine month periods ended September 30, 2011 and 2010 were mainly attributable to the general and administrative expenses which generally consisted of facilities maintenance, depreciation cost and professional fees. The Company is currently merely sustaining its facility and its organization until it obtains the financing necessary to initiate operations. For that reason, its expenses have fallen from 2010, when we were still finalizing development of our products and obtaining licenses. Operating expenses of $68,502 and $195,764, respectively, were incurred during the three and nine months ended September 30, 2011, a reduction from the $82,199 and $268,058 incurred in the three and nine months ended September 30, 2010. In both periods, the Company’s expenses included expenses resulting from its status as a U.S. public company and its efforts to enter into the U.S. capital market.

Management hopes that Yili Asphalt will commence revenue-producing operations in the near future. In order to do so, however, Yili Asphalt will have to obtain approximately $500,000 in working capital to fund the initiation of operations. Management plans to approach a Chinese bank in order to borrow those funds on a secured basis, since Yili Asphalt has $9.0 million in capital assets on its books that are currently free of liens. To date, however, it has not obtained a commitment for the funds. If there is a delay in securing the necessary funds, the date for initiation of revenue-producing operations will be likewise delayed.

Marketing. Yili Asphalt intends to engage in direct marketing of all products lines. Management expects that its direct marketing program will prove to be more efficient over the long term than a distribution network. However, the initial burden on its working capital will be considerable, as Yili Asphalt will have to carry the full cost of a sales staff, the expenses of their marketing activities, such as travel, entertainment, and promotion, and the expenses attendant to sales accounting.

Potentially Inefficient Use of Facilities. To optimize the utilization of our refinery, we will have to generate sales of our products in the proportions in which the refinery is designed to produce them: roughly 6:3:2 for fuel, asphalt and lubricants respectively. It is unlikely that sales will occur naturally in those proportions. If sales in one or two of the categories lag the other(s), management will face the Hobson’s choice of delaying production in the faster selling category, thus losing the benefit of the demand for that category, or tolerating excess inventories of the slower selling categories. This situation would result in additional demands on our working capital.

Additional Working Capital for Growth. We believe there is a high demand for our products in Inner Mongolia and the neighboring provinces. If we are correct, then demand could enable us to quickly expand our operations to full capacity. Growth at that rapid rate would require a commitment of many millions of Dollars for working capital. Our management will have to assess the value of the market opportunities that present themselves, and weight them against the cost of such capital as may be made available to us.

Construction of Dedicated Rail Line. The government of Inner Mongolia has committed to construct a rail line that will have a siding at our refinery. The benefit to us in terms of reduced transportation costs would be substantial. The government’s proposal, however, contemplates that Yili Asphalt will make a substantial capital contribution toward the construction project. The amount of the contribution has not been determined.

Acquisition of Refinery. Chunshi Li, our Chairman, has committed to purchase Mongolia Kailu Yili Asphalt Co., Ltd., an asphalt company with a production capacity of 100,000 tons. He intends to assign his rights in Mongolia Kailu to Yili Asphalt if we are able to fund the cost. The purchase price will be 20 million RMB (approximately $3.1 million). In addition, Mongolia Kailu is currently unproductive due to deterioration of its facilities. In order to bring it back online, we will have to fund the construction of a waterproof coiled material production line at its plant, which will entail an investment of several million more Renminbi.

At the present time, we have received no commitments for the funds required for our planned capital investments. Obtaining those funds, if we can do so, will require that we issue substantial amounts of equity securities or incur significant debts. We believe that the expected return on those investments will justify the cost. Without additional funding, the Company will not be able to pursue its business model. If adequate funds are not available or are not available on acceptable terms when required, we would be required to significantly curtail our operations and would not be able to fund the development of the business envisioned by our business model. These circumstances could have a material adverse effect on our business and result in our inability to continue to operate as a going concern.

The Company's management under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design, maintenance and operation of the Company's disclosure controls and procedures as of September 30, 2011. Pursuant to Rule13a-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, “disclosure controls and procedures” means controls and other procedures that are designed to insure that information required to be disclosed by China Yili in the reports that it files with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time limits specified in the Commission’s rules. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to insure that information China Yili is required to disclose in the reports it files with the Commission is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. In carrying out the evaluation, our Chief Executive and Chief Financial Officer observed the three material weaknesses:

Inadequate staffing and supervision within the accounting operations of our company. The relatively small number of employees who are responsible for accounting functions prevents us from segregating duties within our internal control system. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews.

Lack of expertise in U.S accounting principles among the personnel in our Chinese headquarters. Our books are maintained and our financial statements are prepared by the personnel employed at our executive offices in the City of Tongliao. None of our employees has substantial experience or familiarity with U.S accounting principles. The lack of personnel in our Tongliao office who are trained in U.S. accounting principles is a weakness because it could lead to improper classification of items and other failures to make the entries and adjustments necessary to comply with U.S. GAAP.

Lack of independent control over related party transactions. Chunshi Li is the sole director and sole officer of China Yili Petroleum Company. From time to time Mr. Li has made loans to finance the operations of Yili Asphalt, has contributed assets to Yili Asphalt, and has arranged transactions between Yili Asphalt and other entities under his control. The absence of other directors or officers to review these transactions is a weakness because it could lead to improper classification of such related party transactions.

During the three months ended September 30, 2011, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Nevada		20-2934409
(State of Other Jurisdiction of incorporation or organization)		(I.R.S. Employer I.D. No.)

31	Rule 13a-14(a) Certification

32	Rule 13a-14(b) Certification

101.ins	XBRL Instance

101.xsd	XBRL Schema

101.cal	XBRL Calculation

101.def	XBRL Definition

101.lab	XBRL Label

101.pre	XBRL Presentation

	China Yili Petroleum Company

Date : November 17, 2011	/s/Chunshi Li
	Chunshi Li, Chief Executive Officer
	and Chief Financial Officer